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How high is the cost of leadership on climate change?

New Zealand was chosen to host the Wold Environment Day celebrations we were told, in part because it is prepared to take a leadership role on climate change by introducing the most ambitious and comprehensive emissions trading scheme in the world. Climate Change Minister David Parker said if New Zealand, with a small, educated and wealthy population with a high percentage of renewables in electricity generation can’t lead the way, then who can?

The theory is that once the rest of the world sees how New Zealand has managed to put a price on every tonne of carbon in our economy and continue to survive and even thrive, they will all rush to do the same. There are some problems with this theory though. Reputed economists such as NZIER have concluded that moving ahead of our trade competitors with an emissions trading scheme will come at a significant cost to our economy and we will lose industry to countries that do not put a price on carbon – most likely Asia – where they are in growth mode and where the most common source of fuel for electricity generation is coal.

The other problem with the Minister’s theory is that in the wealth stakes we don’t rate that well. There are countries with a higher GDP per capita than New Zealand, like Singapore, that have no obligations to reduce emissions under the Kyoto Protocol, because they were considered to be developing countries when the Kyoto Protocol was negotiated.

Far from being wealthy, NZIER found that if New Zealand goes ahead with the proposed emissions trading scheme ahead of our trading competitors, in 20 years time we will be just catching up with where Australians are today (in terms of GDP per capita). That is a sobering thought.

If New Zealand does introduce an emissions trading scheme ahead of our trading competitors and it is an economic disaster – what message will the rest of the world take from that example? In addition, it is hard to see any other country putting a price on agricultural emissions as the world faces up to a food shortage crisis.

As it is, the Europe Union, climate change policy leaders with the only mandatory emissions trading scheme in the world (EU ETS) already looks to be beating a retreat as soaring food and oil prices hit home. The EU Commission has made it very clear that energy intensive trade exposed industry can be shielded in future trading periods with 100% allocation of free units or excluded altogether from emissions trading if it is going to result in a loss of industry from Europe.

Despite the changes to the emissions trading Bill announced by government recently (putting the entry of fuel back to 2011 and delaying the phase out of free allocation to trade exposed industry by 5 years), most in the energy intensive and productive sectors will still hold grave concerns for the future profitability of their firm or sector.

There is a big question mark around the ability of the Select Committee to fix all the issues that have been raised in the time available and an increasing concern that in the interests of getting this out of the news, a bad piece of legislation will be rammed through which will have unintended consequences.

What needs to Happen?

People in the business sector appreciate that New Zealand needs to act responsibly and work collectively with the rest of the world to reduce our emissions – the question is how to play a constructive role and maintain the ability to grow our economy. The solution that most in business are putting forward is the need for New Zealand to apply intensity targets (emissions per unit of output) which will encourage new investment in low emission technology and allow growth from those that are at world’s best practice (WBP) in emissions intensity.

If New Zealand producers are the best in the world in emissions intensity – in industry and agriculture, then we should be producing more and displacing that product being produced in a more carbon intensive country. That would be a win for the environment and a win for our economy. If New Zealand imposes an emissions cap, then we will kill off growth – go backwards economically and other countries will pick up the slack – notably those in Asia and South America where emissions caps will not be imposed.

Under the existing Bill, any new investment will face the full cost of carbon, so unless you are a company like an electricity generator and can pass the full cost of that price increase through to your customer, any new investment is likely to be uneconomic and those investment funds will go to countries that do not price carbon.

The NZIER analysis shows over the longer term (20 years) no sector in New Zealand is a winner, even the service sector. This is because the whole economy contracts and the sectors that are the hardest hit are our greatest income earners – the productive sectors and exporters.

The Select Committee should be listening to submitters and economists and do all they can to prevent the leakage of our trade exposed energy intensive sector.

This includes sufficient allocation of emission allowances, no early phase out of allowances regardless of what other countries are doing, remove the cap and move to an intensity based scheme to allow for growth and new cleaner investment and retain the ability to cap the price of carbon if it gets too high and is causing economic pain.

In thinking about future international commitments don’t ignore the mega trends.

This vision of ‘carbon neutrality’ and a low carbon economy ignores where our natural competitive advantage has been (agriculture and processing of primary products) and where future demand is coming from - an increasingly wealthy Asia which wants our products in an increasingly food constrained world.

In the interests of keeping food production up, I would be arguing that agricultural emissions should be excluded from future global climate change deals. If you exclude agriculture, New Zealand’s per capita emissions look much more manageable.

We should be trying to avoid a situation where New Zealand has to spend the next 20 years travelling to international meetings begging other countries to cap their emissions growth – from all sectors and all gases; in the same way we have been unsuccessfully pleading for a reduction in agricultural tariffs and subsidies for the last 20 years.